Ohio V. American Express: Do Monopoly Platforms Deserve Special Treatment Under Antitrust?

WASHINGTON, DC - FEBRUARY 27: People wait in line outside the Supreme Court before oral arguments in several key cases, including Ohio v. American Express Company. (Photo by Drew Angerer/Getty Images)

Yesterday the Supreme Court heard oral arguments in a pivotal antitrust case involving American Express (“AmEx”). The decision could have a profound impact on the way platform-based companies such as Google and AmEx will be treated under the law. Some of the Court's questioning was truly impressive, showing knowledge of both economics and the inner workings of credit card markets. Other questions? Not so much.

Before pointing out the uneconomic utterances, let’s quickly review the case. Credit card companies make money two ways. Card users pay them subscription fees (sometimes) and interest payments. Businesses that accept the cards (“merchants”) also pay credit card companies a fee for processing of the credit transactions. This double-sided business model is termed a “two-sided market” or “two-sided platform.” It isn’t new. Newspapers have been selling subscriptions and ads in a two-sided market for more than a century. What is kind of new is that the internet has made creating these two-sided platforms increasingly common (and easy) by providing places for sellers to find buyers and extracting value from both. Think Uber or Amazon or Google.

A district court found AmEx liable for violating antitrust laws because AmEx imposed anti-steering restrictions on merchants; the court held the restrictions harmed competition. Anti-steering restrictions prevent a merchant from inducing — indeed, even telling — a customer to use a "less expensive" credit card in exchange for a discount on the purchase. For example, AmEx’s restraint prohibits a merchant from telling her customer, “Hey, if you use a low-cost credit card, I will give you 1% off the purchase price, as you will be saving me 1.5 percentage points in charges!”

AmEx appealed that district court's finding to the Second Circuit Court of Appeals, which determined (incorrectly in my view) that it was not sufficient for plaintiffs (the State of Ohio, suing on behalf of its citizens, including citizen merchants) to show antitrust injury to merchants attributable to the anti-steering provisions. Rather, the Second Circuit ruled that plaintiffs have an additional evidentiary burden to show antitrust injury to cardholders as well — that is, the other revenue stream on the same transaction.

The implications of such a special rule for platforms would be profound. It would effectively shield any platform provider — including dominant tech platforms such as Amazon, Facebook and Google, which filed briefs in support of AmEx — from antitrust scrutiny. The reason is that the impact of these restraints on end users such as cardholders is often ambiguous. In contrast, the harm to the "consumers" on the other side of the platform — in this case, merchants — is fairly straightforward to establish. Thus, if a plaintiff in a two-sided market case bears the burden of quantifying an inherently unquantifiable effect, this added requirement serves as an exemption from the antitrust laws for any platform.

Consider the impact of the anti-steering provision on AmEx cardholders here. Any cardholder who was denied the opportunity of a rebate from a merchant was initially injured, as they overpaid the merchant for the goods or services purchased. But how does one identify those particular cardholders? To complicate matters, AmEx takes a piece of that overcharge on merchants and presumably passed it back to cardholders via its generous rebate program. (Disclosure: I’m an Amex Platinum cardholder, and if you have kids and travel, you should be too! I’m an economist, so trust me on this.).

What’s not clear is whether AmEx’s rewards program is any more generous as a result of its anti-steering rules. And if it was more generous, did the heightened reward sufficiently compensate the cardholder for her forgone discounts from the merchant? What’s also not clear is whether AmEx could preserve the same level of rewards with a less-costly restraint on its merchants (known as the "less restrictive means" test). Moreover, economists have shown that in-kind transfers (such as rewards) are never as valuable for consumers as cash payments, because the in-kind transfer comes with restrictions and entails considerable effort to redeem the rewards. The offset here is dubious and complex, and most of the critical information is held by defendants if it even exists. But plaintiffs, argues AmEx, should have the burden to figure this mess out!

And now to the oral arguments

AmEx’s attorney, Evan R. Chesler, looked the justices right in the face and claimed that two plus two equals five. In response to a question from Justice Sotomayor about why Visa and Mastercard raised their merchant fees, Mr. Chesler responded:

“The increases [in fees] by the card companies were, as the district court found, to fuel the intense competition for cardholders, without whom there will be no transactions. That’s what the findings are. And if prices go up because the costs of providing a competitive option to consumers go up, that’s not anticompetitive. That’s procompetitive.”

You read that correctly. If a restraint leads to higher costs for card rivals (actually foreclosing some, like Discover) and leads to higher prices for merchants, that’s a good thing per AmEx. Justice Breyer quickly disabused Mr. Chesler of his tortured logic, noting that: “I would have thought you just said that’s anticompetitive.” Justice Breyer earlier commented that: “When you tell the dealer that he can’t tell the customer that he’s charging a lower price, that’s anticompetitive right then and there, and I don’t see any other argument.” He also noted that AmEx’s restraints would lead to “anticompetitive impact across the country.”

And channeling her inner economist, Justice Kagan elegantly explained the looming lack of cardholder choice if AmEx prevailed: “The problem here is that the effect of these anti-steering provisions means a market where we will only have high cost/high service products.” AmEx’s anti-steering provisions have foreclosed rival card issuers such as Discover, which seek to offer low cost/low rewards, from the marketplace. As Justice Sotomayor noted, “I mean, Discover couldn’t tell them to—or as they tried, very hard, to have the merchant agree to try to pass off the price saving to the customer. They couldn’t do it under American Express’s conditions.”

In his effort to participate in the argument, Justice Gorsuch offered several economic gaffes. As Matt Stoller of Open Markets noted on Twitter, Justice Gorsuch revealed an odd preference for monopolists by asserting: “Judicial errors are a lot harder to correct than an occasional monopoly where you can hope and assume that the market will eventually correct it.” That statement “is based on erroneous assumptions about markets and courts,” commented antitrust professor Jonathan Baker. Law professor Frank Pasquale reacted to Gorsuch's pronouncement by commenting: “Far be it from a SCOTUS justice to bother himself with voluminous research showing that unwavering promotion of false negatives over false positives is nonoptimal, and reflects inadequate engagement with the facts.”

Justice Gorsuch also insisted that, despite evidence of rising merchant fees, rival credit cards had the ability to reduce their fees in the presence of AmEx’s anti-steering restriction:

“I mean, American Express’s agreements don’t affect MasterCard or Visa’s opportunity to cut their fees, their own fees, or to advertise that American Express’s are higher. There is room for all of that kind of competition here. It’s just the difference between Cadillacs and Kias. People can choose.”

Never mind that AmEx’s anti-steering restrictions remove the incentive for rival cards to compete with lower merchant fees, since the cardholder will never learn when the accompanying merchant rebates are available (except perhaps through futile advertisements aimed at cardholders). And a firm needs both the ability and incentive for a counter-strategy to prove effective. Indeed, AmEx’s restrictions induced Visa and Mastercard to raise its merchant fees and mimic AmEx’s high cost/high reward strategy. The U.S. government’s lawyer, Malcolm Stewart, gently pointed out that “if the merchants can’t give their own customers any advantage for using a card that has that effect, then [dropping fees is] a shot in the dark.” But Justice Gorsuch had, through his own statement, gotten in the record that the no-steering rule left untouched Visa’s ability to drop fees (conveniently ignoring that the restraint left them no incentive to do so and remain financially competitive). He also got Ohio’s attorney, Eric Murphy—who displayed a masterful knowledge of both the economics and the caselaw—to "admit" that the noncontroversial proposition that plaintiffs must show market power as part of their proof of antitrust injury.

Coverage gaps under the consumer-welfare standard

A growing policy debate in antitrust circles is whether the consumer-welfare standard of antitrust adequately protects input providers and workers. Antitrust scholar Lina Khan noted that Justice Gorsuch went one step further in shrinking antitrust protections, suggesting that the consumer-welfare standard “does not even reach merchants, aka the non-consumer customers of credit card companies” based on the following exchange:

Apparently, Gorsuch forgot…for the entire hour of argument…that in this case, the merchants are the consumers; they buy the overpriced transaction services from AmEx. And even if you don’t think so, if merchant prices go up, so do consumer prices (in the form of forgone discounts); thus, merchant harm is a proxy for consumer harm.

What AmEx is peddling—and Justice Gorsuch seems to be buying—is that plaintiffs have two separate evidentiary burdens in cases involving “two-sided” platforms: (1) they must show harm to merchants, and (2) they must show harm to cardholders. There is no balancing here. Failure to show (2), regardless of the relative magnitudes of the harms, would not allow plaintiffs to proceed past “step one” of the inquiry, per AmEx’s lawyer. By this standard, even if merchants suffer (say) $1 billion in harm, that could be “offset” by $1 worth of purported benefits to cardholders.

This is a radical prescription that would effectively shield platform providers from antitrust scrutiny. It’s radical because it represents a significant departure from the current treatment of any “offsets” to antitrust injury. For example, if two airlines conspire in the implementation of fuel-surcharge fees, they cannot escape antitrust scrutiny by showing that a portion of those ill-gotten fees was used to subsidize lower base fares for other customers; the purported offset is ignored entirely.

Not only does AmEx seek to incorporate the purported offset to cardholders as an element of the case (which by itself would be novel), but it also wants to place the burden of disproving any offset on plaintiffs as part of their prima facia case. This will stop any antitrust challenge involving a two-sided platform dead in its tracks.

Ohio’s attorney told the Court that it should consider offsets to merchant injury, but that Defendants should bear the burden of demonstrating those offsets. That’s a reasonable middle ground. It is now up to the Court to decide the extent to which platform monopolists deserve special treatment under the antitrust law.